ETFs get their name from being traded on exchanges like stocks. Unlike mutual funds, which trade at NAV, ETFs trade at market prices that can deviate from their NAV. When an ETF trades above its NAV, it’s at a premium; below NAV, it’s at a discount; both scenarios can add hidden costs for investors.
Designated brokers (DBs) help manage these price gaps by creating or redeeming ETF shares at NAV. This process helps align an ETF’s market price with its underlying value and narrows the bid/ask spread.
Larger, more liquid ETFs typically trade close to NAV, minimizing cost. In contrast, smaller ETFs can experience wider spreads and greater price deviations.
Direct Advisory Suite includes data on tracking errors and differences to help advisors evaluate whether an ETF delivers on its stated investment strategy.
To prevent excess costs, here are some best practices to follow: